LawFlash

FINRA Issues Additional Extraordinary Cooperation Guidance

July 17, 2019

Prompted by potential uncertainty regarding the interplay between FINRA Rule 4530(b) (requiring member firms to self-report certain conduct) and FINRA Rule 8210 (obligating those firms to comply with requests for information and documents) on the one hand, and the concept of credit for extraordinary cooperation on the other, FINRA recently issued Regulatory Notice 19-23 to provide its members with supplemental guidance about the circumstances in which credit is warranted.[1]

FINRA has stated on numerous occasions that it seeks to encourage firms to take proactive steps upon discovery of violative conduct by providing credit to firms that promptly take extraordinary steps beyond those required of all FINRA members.[2] RN 19-23 expands on the more-than-a-decade-old guidance in Regulatory Notice 08-70,[3] providing examples and explanations for each of the four types of extraordinary cooperation: (1) self-reporting violative conduct before a regulator becomes aware of it; (2) taking extraordinary steps to correct deficient procedures and systems; (3) providing extraordinary remediation to impacted customers; and (4) providing substantial assistance to FINRA’s investigation.[4]

For those firms that FINRA deems to have provided extraordinary cooperation, there are several ways in which credit can be reflected, including, but not limited to: (1) a substantial reduction in the fine sought by FINRA; (2) eliminating the need for or limiting the scope of an undertaking imposed on the firm (e.g., independent consultant); and/or (3) either no formal disciplinary action or no disciplinary action.[5]

The Notice was accompanied by a press release and a video interview of FINRA Executive Vice President and Head of Enforcement, Susan Schroeder.[6] In the press release, the Notice, and the video, FINRA underscores that its extraordinary cooperation policy has not changed; rather, the Notice is intended to provide transparency on what extraordinary cooperation looks like and how it differs from the cooperation expected of every firm.

What’s New: Key Takeaways from the Supplemental Guidance

Potential Sanctions May Be “Well Below” Sanction Guidelines Ranges. RN 19-23 states that a firm’s extraordinary cooperation may lead Enforcement to recommend a sanction “well below” the ranges reflected in the Sanction Guidelines or relevant precedent.[7] The Notice explains that to better “recognize and incentivize” the actions that constitute extraordinary cooperation, FINRA weighs these steps “so heavily that the outcome of the matter is materially different” than it would have been without the extraordinary efforts taken by the firm.[8] Indeed, FINRA has stated that in these cases reductions in fines “normally will be substantial.”[9]

New AWC Sections Aimed at Transparency. FINRA will now include a section titled, “Credit for Extraordinary Cooperation,” in all Letters of Acceptance, Waiver and Consent (AWCs) for matters in which FINRA determined that the respondent provided extraordinary cooperation.[10] AWCs will also include, as applicable, a new section titled, “Sanctions Considerations,” reflecting any mitigating or aggravating factors considered by the Staff in determining the sanction.[11]

Increased Focus on Remediation and Restitution. Consistent with recent messaging from FINRA regarding its focus on restitution to customers, RN 19-23 places special emphasis on both remediation and restitution as elements of extraordinary cooperation.

Emphasis on Promptness and Breadth of Remediation. The Notice emphasizes and expands on two ideas from the prior guidance: that credit should be given for prompt and immediate remediation to customers and to firms that broaden the scope of FINRA’s investigation.[12] It focuses on “accelerat[ing]” the restitution process to make payments “as quickly as possible.”[13] In RN 08-70, the idea of broadening the investigation is described in the section on remediation to customers. The supplemental guidance suggests that the consideration also applies to corrective action. Specifically, RN 19-23 discusses expanding internal assessments beyond the product or department for which an issue was first identified.[14]

Corrective Action Can Be Before or After a Self-Report. Recognizing that there may be a tension between expecting firms to promptly self-report and the language of the prior guidance, which states that the Staff will give consideration to corrective measures put in place prior to any self-report, FINRA clarified that, where appropriate, it will consider providing credit for remedial measures taken promptly after a self-report.[15]

It Matters Whether Conduct was Proactively Detected. RN 19-23 expands on the prior guidance, which provided that self-reporting before “any regulatory inquiry into the conduct” and before the conduct came to the “regulator’s attention” would be considered, by explicitly stating that it will consider whether the conduct was “proactively detected.” In other words, the Notice implies that conduct detected through “compliance, audits, or other surveillance” will be afforded more weight than detection “only after receiving notice from customers, counterparties or regulators.”[16]

More Examples of Substantial Assistance. The supplemental guidance offers a number of new examples of substantial assistance that may result in extraordinary cooperation credit, including: (i) providing analysis of trading or other data to assist FINRA in its understanding of the issues; (ii) providing detailed information or summaries of events prior to receiving a Rule 8210 or other request; and (iii) conducting a thorough internal audit or investigation, with assistance from counsel or consultants as appropriate, and disclosing the relevant findings to FINRA.[17]

Publication of Matters Resulting in No Formal Action. RN 19-23 states that FINRA will consider, where appropriate and useful, publishing information about cases in which FINRA gave a firm credit for extraordinary cooperation and determined not to proceed with formal action. The publication may include details about the factors that led to the Staff’s decision but will do so anonymously, unless permission is granted by the subject firm.[18]

Practice Points: How to Take Advantage of Credit for Extraordinary Cooperation

Unlike self-reporting pursuant to Rule 4530(b), extraordinary cooperation is not required. While going above and beyond to assist FINRA, taking extraordinary steps to remediate the conduct, and proactively providing restitution to affected customers can result in credit or sanction relief, such relief is not assured and its potential benefits, at the outset, cannot be quantified. As a result, firms that are faced with the decision of whether to offer extraordinary cooperation should continue to be mindful of whether the potential benefits are worth the added regulatory and other costs cooperation may bring.

Where a firm determines that it wishes to seek credit for extraordinary cooperation, it is helpful to develop a plan to do so. In doing so, firms could consider the following:

Where the matter involves a 4530(b) self-report, it may be beneficial to reach out to FINRA in advance of or concurrent with the submission of the report to alert the Staff and begin a dialogue about the matter

Proactively establish a communication plan with FINRA and touch base regularly, even if there are no substantive updates to share

Be transparent with the Staff about the firm’s goal of providing extraordinary cooperation

Request a meeting with the Staff to review the contours of the issue(s), including the cause, scope, impact, and the status of any remediation, and to share a timeline of how the firm intends to proceed

Voluntarily provide key documents, narratives, and data that will aid the Staff in its investigation

When providing data, convey what the data means, how the data should be used, and how the Staff can analyze it

In matters that involve or may potentially involve customer harm, address it with the Staff early and share any plans for remediation and/or restitution with FINRA as soon as practicable

Retain an outside consultant or counsel to lend resources and/or credibility and independence to the firm’s review of the issue and potential remediation

Document the firm’s efforts at providing extraordinary cooperation with the goal of ultimately tying those actions back to the language in RN 08-70 and RN 19-23

Many of the concepts described in the Notice have been taken into consideration by the Staff and understood by member firms, but the memorialization of these points can be a useful tool for firms seeking extraordinary cooperation credit and fair settlements of FINRA investigations.

Contacts

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